Northern Powerhouse Independent Economic Review

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Northern PowerhouseIndependent Economic ReviewFinal Executive Summary Report20 April 2016

Northern Powerhouse Independent Economic ReviewFinal Executive Summary ReportContentsThe Northern Powerhouse . . . at a Glance . i1. Introduction . 12. Understanding the North’s Prosperity and Productivity Gaps . 73. The North’s Competitive Advantage and Sector Strengths . 114. Scenarios for Future Growth in the North . 165. Looking Forward . 25Annex A: Prime and enabling capability maps . A-1Contact:Simon PringleRebecca PatesTel:Approved by:Simon PringleDate:0161 475 21050161 475 2112email:springle@sqw.co.ukrpates@sqw.co.uk20 March 2016Directorwww.sqw.co.uk

Northern Powerhouse Independent Economic ReviewFinal Executive Summary ReportThe Northern Powerhouse . . . at a GlanceFigure 1: The Northern PowerhouseSource: SQWi

Northern Powerhouse Independent Economic ReviewFinal Executive Summary Report1. IntroductionThe North of England is home to 16m people and 7.2m jobs, and generated an economicoutput of around 290bn of Gross Value Added (GVA) in 2015, about one fifth of the UK’s total.The area has a wealth of high profile and growing businesses, and rich sets of expertisecreativity, and assets. But, there remains a persistent gap in GVA per capita and productivityperformance compared to the rest of the UK. HM Treasury analysis has showed that if theNorth’s economy grew as quickly as the UK average to 2030 instead of at the slower rateexperienced in the past two decades, its economic output would be 37bn higher in realterms1). It was with this in opportunity in sight that the Chancellor set out a vision in August2014 to better connect the North and for it to become ‘one Northern Powerhouse’, greaterthan the sum of its parts. This was followed by HM Treasury’s ‘Fixing the Foundations’ reportin 2015, which committed to devolve further powers. The Autumn Statement in late 2015then defined a range of investments in the North’s science and business base to boostproductivity performance and encourage a ‘rebalancing’ of the UK’s economy.Introducing the Independent Economic ReviewIn late October 2015, SQW Ltd and Cambridge Econometrics Ltd (CE), supported by SDG Ltd,John Jarvis Consulting, and (as peer reviewers) Professors Philip McCann (Groningen), RonMartin (Cambridge) and Roger Vickerman (Kent), were appointed by Transport for the North(TfN) on behalf of wider partners, to undertake an Independent Economic Review (IER) ofthe Northern Powerhouse (NPh). Partners’ intentions in commissioning the IER werethreefold: First, to provide data, evidence, and intelligence to underpin TfN’s Northern TransportStrategy in Spring 2016, as an input to the Spring 2016 Budget, and subsequentproposals for transport investment Second, to provide the evidence and arguments around which the ‘narrative’ for theNPh could be forged and developed. Finally, to provide the analytic bedrock on which subsequent NPh development –including, but not limited to, strategy and action planning – could be built andprogressed for the future.What the Review was . . . and what it was notThe Review was seeking to characterise the North’s economic position and the driversunderpinning its performance, and identify opportunities where ‘pan-Northern’ effort cansensibly support existing ‘local’ activities. Whilst key elements of the work drilled down intotransport specifics, the Review as a whole was intended to reflect on the wider economic‘ecosystem’ in the North of England, of which transport is a part (as illustrated ncellors-speech-at-the-cbis-2015-annual-dinner.1

Northern Powerhouse Independent Economic ReviewFinal Executive Summary ReportFigure 1-1: Wider ecosystemSource: SQWImportantly, the Review was not intended as a fully-dimensioned ‘economic baseline’ for theNorth – it focused on five specific Workstreams, detailed below, which covered a range ofdomains. Equally importantly, the IER was not about developing the NPh strategy or actionplan, nor was it concerned with any NPh governance arrangements. Rather, it relied heavilyon a review and synthesis of existing literature and evidence, with additional modelling workby Cambridge Econometrics, building on analysis of the North’s prosperity and productivitygaps, and sectoral performance, as its key evidential foundations.ApproachThe IER was undertaken between late-October 2015 and March 2016. It focused on fiveclearly defined but interrelated Workstreams which sought to understand the scale, natureand causes of the North’s ‘performance gap’, distinctive sectoral strengths andcapabilities at the level of the North, and future growth prospects for the North (seeFigure 1-2 below).2

Northern Powerhouse Independent Economic ReviewFinal Executive Summary ReportFigure 1-2: IER WorkstreamsSource: SQWThe IER study was overseen by an Economic Reference Group, comprising economic leadsfrom all 11 Local Enterprise Partnerships (LEPs) across the North, and a project team led byTfN. The work commenced with a Call for Evidence in early November 2015 via the EconomicReference Group, academic networks, and key stakeholder groups. Evidence was assessedaccording to its relevance, and almost 200 documents, covering some 8,000 pages, weresubsequently reviewed to inform Workstreams 1-32. Alongside this, Cambridge Econometricsanalysed the North’s GVA and productivity performance and sectoral profile – bothhistorically and into the future – using their Local Economy Forecasting Model. In midDecember 2015, draft findings from Workstreams 1-3 were presented to the EconomicReference Group and a meeting of the North’s Leaders and LEP Chairs, before being presentedto the TfN Executive and Partnership Boards just before Christmas.With the evidential foundations in place, in January 2016 the IER’s focus moved on tomodelling future growth scenarios for the North, including a ‘transformational’ scenario forthe North which was ambitious but at the same time credible (Workstream 4). Alongside this,proposals for an Independent Panel to act as ‘guardians of the North’s evidence base’ lookingforward were developed and tested (Workstream 5). Again, draft findings from Workstreams4 and 5 were presented to the Economic Reference Group and the North’s Leaders and LEPChairs, and then the TfN Executive and Partnership Boards in February 2016.This included a range of evidence from academic and policy research, think pieces, and LEPs’ Strategic Economic Plansand underpinning evidence bases. Sources included prominent academics in the fields of economic/spatial growth,productivity performance, Smart Specialisation, and transport economics, N8, SERC, HM Treasury, BIS and DfT, IPPR,Centre for Cities, RSA City Growth Commission, The Northern Way.23

Northern Powerhouse Independent Economic ReviewFinal Executive Summary ReportLearning from the PastThis is not the first time a pan-Northern perspective on economic growth has beenundertaken. The Northern Way operated from 2004 to 2011, and was established to addressthe North’s underperformance on producitivity relative to the rest of the UK through panNorthern priorities, investment and actions. Relevant learning from The Northern Wayexperience, which is instructive for the current context in the North, is summarisedimmediately below.Learning from The Northern WayWhat Worked?Functional economic geography is multi-layered, with some issues best dealt with locally or subregionally, and some at a broader geography. It was only after a review, three years after the launch ofthe Northern Way Growth Strategy (2004) and its dozen or so themes and real operating experience,that it became clear The Northern Way should focus down on Private Sector investment and Innovation,alongside Strategic Transport as those areas with non-contested rationales at pan-Northern level. Otherpolicy areas and drivers of productivity and economic improvement were recognised as being dealt withbest at smaller geographies. Subsidiarity is an important consideration.Crucially, The Northern Way was able to think intelligently for the North, in a way which made peoplelisten. This was partly down to being able to draw in international, national, pan-regional and localthinking on the issues, and relating these to the North. This drew widely on, for instance, the OECD,academics, think tanks, consultants, national government and its agencies, the regional tier and localdecision-makers. The Strategic Transport Priority’s work, progressed in the form of the TransportCompact, benefitted also from long-term relationships with external professional advisors - leaders inthe Transport field – which progressively increased the value from their input.The Northern Way was a ‘standard’ around which Northern interests could cluster. In the case of theN8 Group of Universities, The Northern Way provided initial development capacity, and this Groupmoved on to have an ongoing role in relation to pan-Northern interests in the university research base.It continues to do good work.The initiative was clever in using appropriate mechanisms for its work. Theme groups complementedsubstantially the overall Steering and Management Groups, and were vital for specific expertise. TheTransport Compact was highly successful in providing a forum for evidence based policy advice on panNorthern transport priorities. At the outset, this was considered challenging given competing interestsbut the first meeting of the Compact concluded that backing the investments with the biggest collectiveproductivity impact was the way to go, rather than spreading resources. Over the lifetime of theTransport Compact, this was achieved by confronting parochial assertions with evidenced need, andallowing Transport experts to talk to politicians (and vice versa) in reaching lasting agreements thatinformed The Northern Hub Strategy, the Y-Shaped HS2 network and the roll-out of managedmotorways in the North. The hallmarks of the Compact were, ultimately, strategic leadership, strategicinfluence and effective co-ordination and engagement, these with a preparedness to take some risksand innovate.Importantly, the Transport Compact created the space for debate and conclusions on priorities at astrategic scale which could not be handled regionally, sub-regionally or locally, and which were alsodifficult for national politicians to manage themselves. This is, of course, the gap identified by Sir DavidHiggins in his Rebalancing Britain report, leading to the establishment of Transport for the North as aStatutory Body. Filling this gap effectively and with value added remains a key challenge (and risk area)for Transport for the North going forward.The Innovation in Industry Steering Group also generated confidence from stakeholders and waseffective in acting as a conduit for joint-working with the then Technology Strategy Board, and inpromoting the opportunities in the North. Again by identifying and defining collective interests andsynergistic overlaps, it came forward with an agenda for each and all of participating universities to buyinto, and this continues to be progressedHowever, the mechanisms would have been without value had it not been for the people running theshow and the ways of working adopted. A fundamental part of what worked was the capability andnetworks of The Northern Way’s people.4

Northern Powerhouse Independent Economic ReviewFinal Executive Summary ReportWhat didn’t work?The fundamental rationale for public policy interventions is that action is needed when the market itselfwill not generate an efficient outcome. One of the reasons might be risk over-and-above what themarket is willing to allow for, or the related point of too much uncertainty. Some projects progressed byinitiatives such as The Northern Way will be more successful than others, and care is needed to ensurethat failure does not preclude subsequent innovation and risk taking.On the influencing work of the Northern Way within the North, one of the risk areas was how well thefindings of the initiative’s work were communicated to, and within, partner organisations. This tendedto work most smoothly around the work of the Transport Compact given its focus on pan-northernpriorities. But influencing at all levels was not in the gift of The Northern Way, and this is a lesson forsuch activity in the future, where impact relies on passing on evidence and findings up/downorganisational hierarchies.Northern Way communications often only attracted the attention of locally-based media within the Northand only rarely national equivalents (with the exception of the OECD, which took on board some of theNorthern Way’s research outputs). That has, in some considerable measure, changed with the currentNorthern Powerhouse profile, but unlike say Scotland the North does not have the benefit of dedicatedpan-Northern media outlets.With the long view, not enough people within the North quite understood why the initiative was importantand why certain issues were (and still are) best addressed at a pan-Northern level. This lack of publicconsciousness and relevance was not helped by the focus of The Northern Way on long-term (and oftenpublicly invisible) improvements and the need for changes in public policy. But The Northern Wayhelped seed the ground for Transport for the North by, for example, contributing towards the delivery ofThe Northern Hub and the commitment to new and additional rail rolling stock in what is now therelatively near future. Action is becoming increasingly evident, but more is needed.One of the contributory reasons to the demise of The Northern Way was the reliance on funding fromtoo narrow a partner base. Multiple sources of more diverse income may have helped to ensure somecontinuation in activity, though it is recognised that the difficulties with respect to conflicts betweenfunders was beyond the Initiative’s resolution.Other lessons for successor/similar initiativesInstitutions/initiatives of value and worth that are seeking to address long-term challenges and fulfil longterm objectives need actual, and perceived, stability. Having a clear political mandate can contributepotentially to achieving such stability, but such mandates must be enabling, rather than constraining.Without stability, partnership initiatives such as The Northern Way are vulnerable, hence the importanceof Transport for the North (TfN) to have statutory status with government as a sub-national transportbody, building concensus across the North and speaking with a consistent voice to government.It takes a certain amount of time for initiatives to find their equilibria, and get into their ‘operating strides’.With the exception of the work of the Transport Compact, it was three years before the wider NorthernWay initiative was able to really start to think for itself (following good and thorough self-examination).The pressure on Transport for North to ‘deliver’ means it has no such luxury, but some breathing spacewill be needed to do the thinking and develop/embed the new networks required. TfN will need tomanage the requirement for contined progress with a more medium-to-long term horizon for investmentplanning.More generally, partnership bodies at the scale of the North are complex operations. They requiresufficient in-house staff and the overall capability required to operate strategically at pan-regional scale.New and lean ways of working need to be considered and adopted which avoid unnecessary costs onpartner organisations.For organisations/initiatives which are so people-focussed in terms of their expertise and knowledge, itis vital to build-in, wherever possible, arrangements for embedding knowledge and networks as well assuccession planning for key members of staff. This is important in ensuring inevitable staff change doesnot dilute-out learning and momentum.Source: SQW and John Jarvis5

Northern Powerhouse Independent Economic ReviewFinal Executive Summary ReportTalking TermsThroughout this report, performance is defined through a general measure of prosperity,Gross Value Added (GVA) per capita, the measure most commonly used when comparingthe economies of different regions. This is for two reasons. First, GVA per capita can bedecomposed into drivers of interest such as productivity, employment and dependency rates,and performance gaps in each of these can be analysed. Second because, taken alongsidepopulation assumptions, there is a close link to the output growth aspirations and associatedscenarios.When defining the performance gap, the Reviewers use two alternative comparators: therest of England minus London, and also with London included. Both comparators are ofinterest. On the one hand, London’s unique characteristics as a global city and financial centrewhich are unlikely to be replicable elsewhere in England mean that it may not be a relevantbenchmark for the Northern Economy. On the other hand, one of the aims of promoting betterconnectivity across the Northern economy has been to create an economy of sufficient scaleto realise some of the advantages that a city of London’s size enjoys, which suggests that thecomparator should include London. The gap is also compared to European benchmarks,including the Rhine/Ruhr region (Germany), the Randstad (Netherland), and Lombardy(Italy).Report StructureThis report is a summary of the findings from the IER’s workstreams. It is structured asfollows: Section 2 summarises evidence on the scale, nature and causes of the North’s‘performance gap’ (Workstream 1) Section 3 presents the key sectoral strengths and capabilities of pan-northernsignificance (Workstream 3, drawing on the findings of Workstream 2) Section 4 sets out the future growth scenarios for the North, and compares a ‘businessas usual’ forecast to one where the North’s future is transformed by tackling the widerange of factors that are responsible for the ‘performance gap’ observed in the past(Workstream 4) Section 5 outlines further evidence needs and proposals for ‘guardians’ of the North’sevidence base looking forward (Workstream 5).Detailed reports for each Workstream are available separately from: [insert webaddress]6

Northern Powerhouse Independent Economic ReviewFinal Executive Summary Report2. Understanding the North’s Prosperity andProductivity GapsKey Messages The North’s ‘performance gap’ (measured by GVA per capita)’ is persistent and entrenched,averaging about 25% against the rest of England, and 10-15% when London is removed.Having been on a downward trend since the early 2000s, the gap has widened since the2008/09 recession. Productivity accounts for the largest proportion of the ‘performance gap’, and is also associatedmore closely with the widening of the gap in the post-recession period. Nonetheless, theemployment rate gap has also been persistent, and largely stable over the past decade. The North’s skills gap appears to be the most important factor driving the overall ‘performancegap’, as it influences both productivity and the employment rate. This has worsened since therecession, in part due to out-migration of skilled workers to the southern regions whereemployment prospects are better. Other important causes of the North’s productivity gap includeunder-investment (a gap which has widened notably since 2008), low enterprise rates, a lack ofagglomeration and poor connectivity, compared to benchmarks. The North’s sectoral mixaccounts for very little of the productivity gap.Thi

Northern Powerhouse Independent Economic Review Final Executive Summary Report 4 Learning from the Past This is not the first time a pan-Northern perspective on economic growth has been undertaken. The Northern Way operated from 2004 to 2011, and was established to address

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